Taylor Morrison Home Corporation

Good morning and welcome to Taylor Morrison's fourth quarter 2022 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Arun, Vice President of Investor Relations.

Thank you and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements that are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the investor relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statement. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now, I will turn the call over to our Chairman and Chief Executive Officer, Cheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Lou Steffens, our Chief Financial Officer, and Eric Huser, our Chief Corporate Operations Officer. As always, I will share our performance highlights, an update on the market, and our strategic priorities. After my remarks, Eric will discuss our land portfolio and investments, as well as an update on our build-to-rent business while Lou will provide a detailed review of our financial results and guidance metrics. Our team's strong fourth quarter execution wrapped up a historic year for Taylor Morrison, marked by record levels of profitability and operational performance. Despite the swift change in housing market conditions that unfolded during the year, our team delivered over 12,600 homes at a record adjusted home closings gross margin of 25.5%, which was at more than 500 basis points, and an all-time low SG&A ratio of 8.2%. This produced a nearly 60% increase in our net income on a 10% increase in total revenue. These earnings drove strong cash flow, which we deployed to further strengthen our balance sheet by significantly reducing our net home building leverage to 24% from 34% at the end of 2021 and repurchase approximately 12% of our shares outstanding after investing $1.6 billion into our core home building business. As a result, our book value per share increased 33% to more than $42, and our return on equity improved nearly 700 basis points to over 24%. In total, these record results validate the transformational impacts of our successful integrations and operational strategies that have made us a stronger company with enhanced earning powers and increased optionality with which to invest for long-term profitable growth. At Taylor Morrison, we benefit from the well-balanced, diverse mix of our portfolio and operating strategy. Having expanded our market footprint and product positioning in recent years through our acquisitions and smart organic growth, we serve a broad range of customers in the entry-level, first and second move-up, and resort lifestyle segments across the country. With each of these consumer groups demanding varying levels of home specification and affordability considerations, we have a dynamic and flexible operating strategy that allows us to best serve each of these segments and respond quickly to market conditions, community by community, to maximize our performance. Since interest rates began rising last year, this flexible but prudent approach has driven important shifts in our pricing strategies starts volume, and land investments as we quickly adapted to minimize risk and recalibrate affordability. From a pricing perspective, we have adjusted to market conditions across the entirety of our portfolio to drive sales and turn our inventory while also protecting the value of our highly profitable backlog. We flex our various pricing levers starting with finance incentives and then lot and option premiums, and most selectively, base price, with each community's mix of adjustments dependent on its backlog, inventory, duration, competitive dynamics, and of course, consumer group. Generally speaking, our entry-level communities respond best to a combination of mortgage incentives and base price adjustments, while our higher-priced move-up and resort lifestyle communities emphasize reduced lot premiums design center concessions, and mortgage incentives. The success of these strategies was evident in our fourth quarter results and have been even more encouraging thus far in the new year. We are in the early days of the spring selling season, and typical seasonality has been anything but typical in recent years. But so far, we have been pleased with the positive momentum in sales activity and shopper sentiment since mid-January. Specifically, through the first six weeks of the year, our gross sales orders have improved to a more normalized pace of approximately three per month, and our cancellation rate has trended into the mid-teens, driving our net sales pace to 2.5 as compared to 1.9 in the fourth quarter. Aiding the positive sales activity, the vast majority of our customers in backlog are strongly committed to moving forward with their home purchase and are secured by an average deposit of 10% or nearly $70,000 per home. In addition, our buyers financed by Taylor Morrison Home Funding, whose capture rate improved to 78%, had an average credit score of 753 and provided an average down payment of 24% in the fourth quarter, both of which were stronger than a year ago. Together, these factors contributed to our fourth quarter cancellation rate remaining well below the industry average and consistent with our long-term trend at just over 7% of our opening backlog. While housing market conditions overall remain well below peak levels and the outlook is highly uncertain, we believe these encouraging trends underscore the enduring desire and demand for home ownership and financial strength in our targeted consumer groups, as well as the limited availability of competitive inventory, particularly in our core community locations. In addition to using strategic pricing tools to solve for the affordability constraints in the market, our construction and purchasing teams are aggressively pursuing cost rationalization opportunities with our suppliers and within our building processes and product offerings. Meanwhile, as Lou will detail in just a moment, we have moderated our starts volume to align with sales activity and targeted inventory levels with a focus on driving healthy asset terms and cash generation. Our heightened focus on rationalizing the breadth and depth of our option offerings and floor plan library since 2020, including the expanded use of our national Canvas option packages in all spec homes, and a more targeted design center approach for our to-be-built homes has greatly improved our production efficiencies and ability to quickly capture cost savings while not reducing the average option revenue per home. In fact, it's worth highlighting that 64% of our fourth quarter gross sales orders were for spec homes, up from 47% a year ago and 28% two years ago. Enabled by our team's effective inventory positioning by price point, this shift has further streamlined our purchasing and construction while also allowing us to meet specific consumer demand. In addition, despite the meaningful increase in our spec sales, our average square footage in 2022 was down less than 100 square feet year over year, suggesting that buyers across consumer groups continue to value the space with our data suggesting buyers would be willing to trade off included features and premium home sites. On the topic of meeting consumers where they are, I'd like to also highlight the success we are seeing from the ongoing advancement in our digital sales tools that empower our prospective buyers to engage and shop with us when and how they want to, all while providing improved visibility into purchase price and monthly payment. in an online shopping experience unlike any other in the industry. Our first-of-its-kind online home reservation system is available for all spec homes and in most communities that offer to-be-built homes, allowing shoppers to choose their desired lot, floor plan, and exterior selections as well as popular structural options, interior design packages, and upgrades in the most recently enhanced version that we began rolling out last quarter. In total, our online reservation system was our top lead source last year with a conversion rate of 40% in the fourth quarter and 32% for the year, driving 12% of our total sales. With nearly 70% of these reservations for a future home purchase made by consumers who did so prior to ever visiting the community in person, I believe it's safe to say that this volume represents incremental business earned by engaging with customers in a way most fitting for them. Backed by these exciting consumer insights, our team continues to redesign the home shopping journey and I look forward to sharing our continued progress. Our focus on operational flexibility, innovation in our sales program and customer experience were the key messages that our leadership team recently delivered in person to each of our divisions during a 19-stop roadshow in January, the first of its kind since before the pandemic. To meet face-to-face with all of our nearly 3,000 team members was a great way to kick off the new year and align on the operational strategies that will guide our path to success in 2023 and beyond. Now I will turn the call over to Eric to discuss our land investment strategy.